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Negotiating International Agreements: Understanding Governing Law & Jurisdiction Clauses

Introduction


Most agreements, particularly those of an international nature, will have a ‘Governing Law and Jurisdiction’ (L&J) clause which can sometimes be split into two separate provisions.

Essentially the L&J clause stipulates which body of law applies to the contract and which country’s legal system applies should a dispute arise.


Law & Jurisdiction


If both parties are resident in the UK and the agreed transaction is carried out in the UK, one may think a L&J Clause unnecessary. However, even within the UK there may be differences in laws between for instance England and Scotland.

Once cross border agreements are entered into it isn’t just a simple case of stating English governing law be used and English courts therefore have jurisdiction. Even if judgement is given in your favour in an English court, its commercial worth often depends on its enforceability and the location of the defendant’s assets.

For example, whilst an English judgment can be easily enforced against assets located in the UK and elsewhere in Europe there are no reciprocal enforcement treaties between the UK and numerous other countries including the USA, China and Saudi Arabia.

If a contract between a Chinese company and an English company provides for the jurisdiction of the English courts but the Chinese company has no assets in England, the English company may have little protection as China does not enforce English court judgments.

In these circumstances the parties may be better off with an arbitration clause because arbitral awards are widely enforceable by virtue of the New York Convention.

Even then, matters are not entirely straightforward as, for example, Saudi Arabia ratified the New York Convention in 1993. Enforcement of overseas judgments in Saudi Arabia has, however, continued to prove problematic as the authority with jurisdiction to enforce them has often considered that an award is not compatible with public policy or with the principles of Shariah law.


What happens if there is no L&J Clause?


In this case the location of the parties will be decided by the relevant court in accordance with a myriad of complex rules and laws. Naturally this is stressful not least because of the additional costs!


Conclusion


The benefits of including an L&J clause are clear but it is a matter of negotiation for the parties.

Whatever is agreed, it is important that both parties have full understanding of the potential effects on their agreement.

 

This should not be relied upon for legal advice. If you would like any further information or advice please email richard@clariclegal.co.uk.



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